Michigan State University Bulletin
November 8, 2007

Researcher: High taxes can spur growth

By Andy Henion

As controversy continues to swirl around the Michigan Legislature’s move to raise taxes, an MSU researcher argues that communities with high taxes and robust urban infrastructures attract more private companies and development.

Igor Vojnovic, associate professor of geography, contends the long-standing claim that low local and state taxes make a city more competitive in the business world has not proven true.

In the December issue of GeoJournal, an international journal of geography, Vojnovic’s financial analysis of major U.S. cities and the concentration of the world’s 100 largest corporations shows that cities with high taxes and spending on public infrastructure and welfare – such as New York, San Francisco and Boston – tend to experience more commercial growth.
Vojnovic also said Michigan and its communities have not kept pace.

“In Michigan, you continue to hear that we should lower taxes to boost competitiveness,” he said. “This has not worked for the last two decades. We have been dropping taxes and we’re not developing. In fact, as evident with the state’s ongoing decline, we have been losing economic competitiveness since adopting this policy direction.”

The Legislature, in an effort to help balance the state budget, voted Oct. 1 to raise the income tax from 3.9 percent to 4.35 percent and to expand the 6 percent sales tax to some services.

Vojnovic’s research shows that significant community investment through taxes, charges and other revenues can benefit both the private and public sectors. New York City, for example, has one of the nation’s highest per-capita local taxes – $7,308 – but is also the world leader in attracting major corporations. In addition, New York has one of the highest expenditures on public welfare and parks and recreation, and invests heavily in physical infrastructure such as its world-renowned subway system, Vojnovic said. San Francisco, Boston and Los Angeles maintain similar public finance and corporate investment profiles.

Vojnovic said that to business, robust urban infrastructures such as education, transportation and telecommunications are more important than lower taxes. “Urban infrastructure enables corporations to run effectively and efficiently.”

According to the research, low-tax cities such as Houston and Phoenix attract far fewer companies and have less to invest in urban infrastructures, and particularly in education, which is favored by corporate leaders in today’s high-tech economy. Vojnovic explained that “Houston, for instance, does well with petroleum-related industries, but the city and locally based firms have received extensive, and in some cases unprecedented, federal and state government subsidies to develop Houston’s petroleum-related infrastructure, from transportation to pipelines.”

Detroit is an exception – a high-tax urban region that has failed to invest appropriately in education, public transportation and other important programs, Vojnovic said.

In a forthcoming book, Michigan: A Geography and Geology, Vojnovic explores the consequences of urban decentralization in Michigan.

“Detroit is fighting a losing battle as it’s constantly competing with suburban infrastructure investment that draws the population and businesses further into the periphery,” he said. Eventually, the urban region becomes so dispersed that it loses its economic competitiveness.

In contrast, top performing U.S. cities and their state governments have focused investment to revamp local infrastructures and redevelop urban cores to accommodate higher business and residential densities.

“The best performing cities and regions,” he wrote, “maintain the most robust urban infrastructures, including public welfare programs, and have so historically, while also being key global economic performers.” Vojnovic said, “These investment patterns are consistent nationally and internationally as evident with Tokyo, Paris, London, Beijing, Seoul and Zurich.”